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Charles Schwab Investment Management

Equities: The end of the beginning, or ...

Omar Aguilar, Ph.D.

Chief Investment Officer,
Equities and Multi-Asset Strategies

... the beginning of the end?

August was the U.S. equity market’s worst-performing month since before Election Day, occurring in spite of solid underlying economic data and strong second-quarter corporate earnings results. On the surface, this may seem like the start of a correction, given that stock valuations have been trading above their long-term averages for quite some time. However, this year’s momentum-driven rally in cyclical stocks has continued to perform well, with shares of select Technology companies and online retailers outperforming the broader market. So for the moment, equities may have some room left to run, although it is important to realize that current conditions have historically signaled the start of a bull market’s final phase.

Proceed with caution ahead of the fall

There are plenty of reasons to be cautious as summer winds down and fall approaches. In particular, geopolitical risks have risen as tensions with North Korea have escalated. This could translate into increased demand for traditional safe-havens like Treasuries, gold, and the U.S. dollar. Uncertainty surrounding upcoming policy decisions regarding the U.S. debt ceiling, potential government shutdown, budget negotiations, and tax reform could spark market volatility. In addition, although most natural disasters tend to have a limited long-term growth impact, Hurricane Harvey has already resulted in short-term ramifications for gas prices, oil refiners, and insurance companies.

Fixed Income: Shutdowns and debt ceilings

Brett Wander, CFA

Chief Investment Officer,
Fixed Income

Washington D.C.’s crazy time of year

This is the time of year when things get really crazy in D.C. Market pundits are focusing intently on the potential for a federal government shutdown and failure to raise the debt limit. Contrary to common misperceptions, these two scenarios are quite distinct, and can have hugely different consequences.

Shutting down the Federal Government

If Congress and the president fail to pass a budget by September 30, the government will shut down. Shutdowns have happened 17 times over the past 40 years, so they’re hardly unprecedented. In fact, most critical functions like military and emergency services aren’t affected. However, family vacation plans to Yellowstone may require a Plan B. The markets wouldn’t love a shutdown, but they’re usually only a few days, so the impact could be muted.

Failure to raise the debt limit

Now this would not be good! For the Treasury to pay its debts, it has to issue new debt, and this requires an increase in the debt limit (ceiling). If Congress fails to raise the debt ceiling by early October, absent “extraordinary measures,” the government would face the possibility of temporarily defaulting. Stock and bond prices would likely fall, and if that happened, the U.S. dollar would lose its safe-haven status. Congressional leaders have assured the public that they’d never let this happen. But just to be extra safe, avoiding Treasuries maturing in October might make sense.

Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.

Not FDIC-Insured · No Bank Guarantee · May Lose Value

Important disclosures

Past performance is no guarantee of future results.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice (either under the Investment Advisers Act of 1940, or the Department of Labor’s Fiduciary Advice Rule). The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Some of the statements in this document may be forward looking and contain certain risks and uncertainties.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.